Asset Pricing with Liquidity Risk

Viral V. Acharya () and Lasse Heje Pedersen

No 3749, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper studies equilibrium asset pricing with liquidity risk (the risk arising from unpredictable changes in liquidity over time). It is shown that the required return on a security depends on its expected illiquidity, the covariances of its own return, illiquidity with market return, and market illiquidity. This gives rise to a liquidity-adjusted capital asset pricing model. Further, if a security's liquidity is persistent, a shock to its illiquidity results in low contemporaneous returns and high predicted future returns. Empirical evidence based on cross-sectional tests is consistent with liquidity risk being priced.

Keywords: capital asset pricing model (CAPM); equilibrium asset pricing; liquidity; liquidity premium; liquidity risk (search for similar items in EconPapers)
JEL-codes: D50 G11 G12 G30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn and nep-fin
Date: 2003-02
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Related works:
Working Paper: Asset Pricing with Liquidity Risk (2004)
Working Paper: Asset Pricing with Liquidity Risk (2004)
Journal Article: Asset pricing with liquidity risk (2005)
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